Which equity markets offer value?

Following the market recovery in the first quarter of 2019, equity markets aren’t as undervalued as they were at the start of the year, according to Luc de la Durantaye, chief investment officer at CIBC Asset Management. In order to find value now, investors must look to markets with solid growth prospects.

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One such market is Canada, where equities are “trading at not too expensive price earnings,” he said in an interview earlier this month. “And if there is stabilization in global economic activity, that should help the Canadian market.”

In particular, the recent stabilization in Chinese economic data is supporting commodity prices in Canada, he said.

“We’ve seen oil prices remaining at elevated levels,” he said. “We’ve also seen commodities, like copper, remaining at elevated levels. Those are elements that are typically favourable for a resource-tilted market” like Canada.

The U.S. Federal Reserve likely remaining on the sidelines for the remainder of the year “alleviates some of the pressure that came last year from rising interest rates in the U.S., and a rising U.S. dollar,” he said.

This will help not only the Canadian equity market but also emerging markets, de la Durantaye said. The key is to focus on “opportunities in emerging markets where you can still find attractive valuation and decent growth prospects.” This includes China, he said, where “growth is stabilizing” and there are attractive domestic opportunities.

Challenges remain for Europe, U.S.

The outlook for Europe is more challenging, de la Durantaye said.

“On the one hand, you can see there’s a number of markets there that look cheap,” he said.

“But we have to be careful about falling into some value traps where economic activity is still not showing signs of bottoming in Europe. We have to keep in mind that policy leeway, both from monetary and fiscal policy, are not very strong. We have to be a lot more nimble in European markets. You really have to pick your spot.”

Meanwhile, even though the U.S. remains overvalued, that hasn’t prevented it from performing “relatively well,” he said.

“But we continue to hear noise” about regulation in the technology sector.

“We see some well-known names in the U.S. that could be affected by regulations, or new entrants and competitiveness,” he said. “So we’re still a little bit hesitant about the U.S. market, given the valuation and some of the risks in regulation there.”

Facebook has faced increased scrutiny about user privacy following the scandal last year around U.K. political consulting firm Cambridge Analytica and the role of fake news in the 2016 U.S. presidential election. Facebook and Google have faced fines in the EU for issues around user data and competition, respectively.

Meanwhile, Democratic presidential candidate Elizabeth Warren is running on a platform to break up big tech companies.

Overall, de la Durantaye said that with continued economic stabilization, equity markets “will get some decent returns” for the rest of the year. “But they will be more modest than the returns that we’ve just witnessed in the first quarter.”

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